Bankruptcy as a means of debt relief should be a last resort, but is an option. A reader who found themselves with too much credit card debt asks “Could you tell me about bankrupcy? I don’t know anything about it. What does it protect, what other things do I get from it. When can I go bankrupt?
I’m in real trouble, and have massive credit card debt. I made the mistake of letting my girlfriend do the finances. I didn’t know I was living way, way, way beyond my means. My unsecured debt increased more than my take home pay last year. So, I’m wondering if this is the way to go.”
As you may know, in previous times there was a real stigma associated with filing bankruptcy, but such a stigma no longer really exists, and many, if not most, people who file bankruptcy go on to have a second (or in some cases third) chance to rebuild their credit, and do so very successfully. In fact it has never been easier for a person who has filed bankruptcy to rebuild their credit as it is right now. In 2003 alone, there were more than 1.5 million personal bankruptcies filed, representing more than 2 million people (many of those 1.5 million cases were married couples). Contrast this to just 20 years ago, when in 1983 there were only 300,000 personal bankruptcies filed. In 1999 it was estimated that one out of every 68 families had filed for bankruptcy at some time or another, and in February of 2004 U.S. Representative Pete Sessions stated that “It has been estimated that if current practices continue, one out of every seven households will have filed for bankruptcy by the end of the decade”. (It should be noted that Rep. Sessions was speaking in favour of bankruptcy reform at the time.)
This doesn’t mean that the decision to file bankruptcy should be taken lightly – it shouldn’t. It is still a very serious decision, and one which should be made with expert assistance. Most bankruptcy attorneys will provide you with a free consultation, and you should get at least two if not three such consultations before making your decision. There are other options to explore, as well, such as a consumer credit counseling service.
With respect to your substantive questions, primarily what bankruptcy does for you is to provide relief from crushing debt which you believe you will not be able to satisfy by any ordinary (or indeed extraordinary) means. Bankruptcy allows you to make a fresh start of things, wiping out nearly all debt (some debt, such as child support, cannot be discharged in bankruptcy). It should be noted that of course most credit-granting institutions will be understandably reluctant to grant you new credit once you have filed for bankruptcy, and it will take some time to rebuild your credit. The typical conventional wisdom is that it will be seven years before you can start to rebuild your credit – that figure was based on the length of time a bankruptcy used to be thought to stay on one’s credit record. The bad news is that with the advent of the Internet, and interlinked and crosslinked financial and other records, the fact that you filed for bankruptcy may never truly be expunged from all evidence. The good news is that one can often rebuild their credit much sooner than seven years after filing bankruptcy.
There are two basic types of bankruptcy available to individuals: Chapter 7, and Chapter 13 (named for the chapters in the Federal bankruptcy code – all bankruptcies, by the way, are controlled by Federal law).
Chapter 7 bankruptcy allows you to keep everything which you own which is already paid for, and discharges (relieves you from) all outstanding debt, with the exceptions such as child support as noted above (other exceptions include student loans and tax debt which are not more than a certain number of years old). Chapter 13 bankruptcy, while similar to Chapter 7, allows you to retain some debt and make payments on that debt – this is useful where, for example, you own a home which may be in foreclosure and which you wish to try to retain.
If you do decide to file for bankruptcy, it is critical that you list all of your debts, because if you don’t, you may find that after you have filed you still have outstanding debt for which you will be responsible. So be sure that you have a complete list of all of your outstanding debt, including things for which you may not have a typical record (“I’ll gladly pay you Tuesday for a hamburger today”). It’s a good idea to have a credit report run just before you file your bankruptcy, so that you can be sure you didn’t miss anything.